Shariah Supervisory Board

Shariah Supervisory Board (SSB) is one of the main components of an Islamic bank. Shariah boards have fiduciary responsibilities towards the institution’s stakeholders.

In theory, the role of SSB involves six areas:

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Provide fatwas that certify permissible financial products;

Undertake Shariah audit to ensure products comply with guidelines;

Calculate zakat payments;

Dispose of non-Shariah compliant income or earnings;

Provide advice to the bank on the distribution of income to shareholders or depositors/investment account holders.

Provide guidance to the bank on its wider social role

However, in practice, the role of Shariah boards varies significantly from one country to another. Further, there are three types of Shariah boards:

International Shariah Boards: For example, AAOIFI, Islamic Development Bank (IDB). The main role of AAOIFI’s Shariah board is to publish Shariah standards in order to harmonise the industry’s practices. The IDB Shariah boards acts in advisory capacity by providing Shariah opinions and working closely with other international agencies (such as: IFSB) in developing standards.

National Shariah Boards: For example, Malaysia, Pakistan, Sudan, Indonesia. In this case, the national Shariah board has the overall authority on Shariah governance framework and policy.

Institutional Shariah Boards: These are commonly referred to as Shariah Supervisory Boards (SSBs) and work on an institutional level.

Challenges Facing Shariah Supervisory Board

SSBs include some of the most prominent and respected scholars. Many of these scholars are highly regarded with their opinions having the potential to move markets. Nonetheless, concerns have been raised, that since Shariah scholars are generally employed directly by the financial institutions, their independence can be compromised, since bank managers use their influence to gain more acceptable opinions. This has been commonly referred to as “Fatwa shopping” or “Shariah advisory à la carte”.

Moreover, a decentralised approach to Shariah governance has led to further fragmentation in the industry, increasing transaction costs and overall efficiency of Islamic banks, compared to conventional banks. This has led to calls for a nationalised approach to Shariah governance. (One of the main arguments in favour of the Shariah board for each individual institution is that it encourages product development and innovation in the fast-growing industry).

Exhibit 1: Shariah Governance Framework (Key markets)

Country

Centralized SSB or High Shariah Authority or Fatwa Board

Islamic Rating Agency

Jordan

No

No

Malaysia

Yes

Yes

Sudan

Yes

No

Bahrain

No

No

Kuwait

Yes

No

Pakistan

Yes

No

UAE

Yes

No

Indonesia

Yes

No

Source: World Bank

Exhibit 2: Shariah Corporate Governance Institutions by Country

Country

Separate Islamic Banking & Takaful Department

Centralized SSB or High Shariah

Islamic Rating Agency

Separate Islamic Capital Market Department

Bahrain

Yes, Islamic Financial Institutions Supervision Directorate

No, but the International Islamic Financial Market is to promote the harmonization and convergence of Shariah interpretations in developing Islamic banking products and practices which are universally acceptable

No, but International Islamic Rating Agency operates in Bahrain

No

Indonesia

Yes, the Directorate of Shariah Banking

Yes, the National Shariah Board is authorized to issue fatwas concerning products, services and operations of BIFS. It also recommends Shariah advisors to BIFS

No

Jordan

No

No

No

No

Kuwait

No

The Fatwa Board in the Ministry of Awqaf and Islamic Affairs is the final authority on Shariah disputes. Its advice is binding when it arbitrates on disputes between members of the same SSB

No

No

Malaysia

Yes, Regulation Department –Islamic Banking and Takaful

Yes. The Shariah Council advises central bank on Shariah matters and is the ultimate arbiter in Shariah interpretation disputes. The directives issued by BNM in consultation with the Shariah Council have binding authority over Banks with Islamic windows.

Yes, Malaysian Rating Corporation - Islamic Capital Market Department

Yes, Malaysian SEC- Islamic Capital Market Department. The SEC also has its own Shariah Advisory Board

Yes, the Shariah Board of the State Bank is to advise the central banks on matters of Shariah. It also produces specimen of permissible Islamic Financial contract to ensure compliance with minimum Shariah standards

No

No, but several departments share Islamic finance portfolio

UAE

No

Yes, the Higher Shariah Authority, attached to the Ministry of Justice and Islamic Affairs, is the final arbiter on Shariah matters. It is also responsible of Shariah supervision

No

No

Source: Official country websites and central bank Annual Reports; World Bank